This case involves a class action brought by military veterans who purchased homes under the VA home loan guaranty program. The district court1 granted summary judgment to the class and enjoined the VA from obtaining a deficiency from the veterans under the VA's right of indemnity when the VA orders non-judicial foreclosure on VA home loans in Minnesota. 742 F. Supp. 1039. The plaintiff class members either defaulted on their loans or sold their homes to buyers who assumed the VA loan and then defaulted.2 The private lenders then foreclosed and collected any deficiencies from the VA as guarantor. See generally 38 U.S.C. §§ 1801-1833 (Supp.1991); 38 C.F.R. §§ 36.4316-4319 (1990). The VA in turn sought indemnification from the veterans. The VA has intercepted tax refunds and medical disability checks to collect on deficiencies allegedly owed by veteran mortgagors under this system.

The statute and VA regulations do not establish a uniform federal procedure for foreclosure but instead contemplate application of state foreclosure law. See 38 U.S.C. § 1820(a)(6).3 Under Minnesota statutes, foreclosure may be done under a judicial procedure requiring notice to the mortgagor, or by advertisement in which case the mortgagor does not receive notice. See Minn.Stat. § 580.01 (1990); See also Norwest Bank Hastings Nat'l Assoc. v. Franzmeier, 355 N.W.2d 431, 433 (Minn.Ct.App.1984) (describing different foreclosure procedures). When the latter procedure is used, Minnesota law bars a mortgagee from obtaining a deficiency judgment because the mortgagor has no opportunity to ensure that the real estate is sold for fair value. Minn.Stat. § 582.30 subd. 2 (1990). Generally the VA uses non-judicial foreclosure because it is more efficient and less costly.

The VA urges that it has an independent right of indemnity that survives the anti-deficiency statute under Minnesota law. Alternatively, if Minnesota law precludes any type of recovery from the veteran after non-judicial foreclosure, the VA argues that its right of indemnity preempts Minnesota law.4

The district court recognized that the VA has a right of indemnity. This right is incorporated into the VA's regulations, 38 C.F.R. § 36.4323(e), and the Supreme Court has recognized that the VA's enabling legislation affords the VA an independent right of indemnity. United States v. Shimer, 367 U.S. 374, 387-88, 81 S. Ct. 1554, 1562-63, 6 L. Ed. 2d 908 (1961). The VA urges that this right is independent of and superior to the state anti-deficiency statute.

The district court denied the VA's claims under the authority of Whitehead v. Derwinski, 904 F.2d 1362 (9th Cir.1990). In Whitehead, a similar class suit brought against the VA, the Ninth Circuit faced the identical issue although under Washington law. The court found no federal preemption because Washington foreclosure law was not inconsistent with federal law.5 However, the court found that the VA forfeited its indemnity rights along with its subrogation rights when it opted to use foreclosure by advertisement. In doing so, the Ninth Circuit characterized the VA's statutory right of subrogation as its primary right.6 The court observed:

Because the VA directs the lender's choice between the two methods available in Washington, it is in complete control of its ability to be made whole. Given the availability of the judicial foreclosure alternative, which allows the VA to exercise its primary right to subrogation and proceed directly against the debtor, the VA may not choose the non-judicial foreclosure alternative, and then resort to its right to indemnity. The federal statutory and regulatory scheme contemplates reliance on state foreclosure procedures. Where state procedures preclude holding the debtor personally liable, the VA retains its right to do so by way of indemnity. Where, as in the state of Washington, state foreclosure procedures afford the VA identical protections, there is no conflicting state law to displace.

Id. at 1369.

Allowing the VA to ignore Washington law "would disrupt commercial relationships predicated on state law." [United States v.] Kimbell Foods, 440 U.S. at 729, 99 S.Ct. [1448] at 1459 [59 L. Ed. 2d 711 (1979) ]. In adopting the dual foreclosure scheme, the Washington legislature balanced the debtors' and lenders' rights. See Donovick v. Seattle-First Nat'l Bank, 111 Wash.2d 413, 757 P.2d 1378, 1379-80 (1988) (en banc). "Non-judicial foreclosure obviously provides significant advantages to a creditor seeking to liquidate security for a defaulted loan; these advantages have been conferred by the legislature in return for the creditors' relinquishment of the right to obtain a deficiency judgment." United States v. Vallejo, 660 F. Supp. 535, 538 (W.D.Wash.1987). Allowing the VA to instruct lenders to foreclose non-judicially under Washington law, and then use its federal right to indemnity to override the consequences of that instruction, circumvents the balance the state legislature intended in designing and adopting the two foreclosure options.

Id. at 1372.

The district court applied the reasoning in Whitehead and issued an injunction barring the VA's recovery. We must respectfully disagree with this analysis. First, we cannot agree with the Whitehead premise that when the state provides dual foreclosure procedures the judicial foreclosure procedure is primary and the non-judicial procedure is secondary. No rationale exists for this conclusion. Each foreclosure process stands on its own footing and provides different consequences. As the Ninth Circuit observed, the non-judicial procedure contains significant advantages to the creditor, but the debtor's interest is protected by relinquishment of the right of the creditor to obtain a deficiency judgment. Id.

The Whitehead court concluded that the federal right of indemnity cannot override the state interest in protecting the debtor under the anti-deficiency law. Beyond the state law provision that subrogation rights are lost in non-judicial foreclosure, the court further found that the VA's independent right of indemnity somehow disappears as well. The Whitehead court apparently found the indemnity right subsumed in the VA's right of subrogation.7

Although Minnesota and Washington law are identical in providing both a judicial foreclosure procedure, which would preserve the VA's right of subrogation against the veteran, and a non-judicial foreclosure procedure, under which no deficiency judgment may be obtained, Minnesota law affirmatively recognizes that rights of third parties under contracts of guaranty survive the anti-deficiency laws of Minnesota.

In Victory Highway Village, Inc. v. Weaver, 634 F.2d 1099 (8th Cir.1980), we held that Minnesota's anti-deficiency statute did not discharge the liability of a guarantor of a Small Business Administration (SBA) loan after the SBA foreclosed by advertisement. Id. at 1102-03; see also National City Bank v. Lundgren, 435 N.W.2d 588, 591-92 (Minn.Ct.App.1989) (citing with approval the Victory Highway court's interpretation of Minnesota law). The principle behind the Victory Highway decision is that Minnesota's anti-deficiency statute does not extinguish claims by the mortgagee based on rights derived from sources other than the mortgage. The language of the statute addresses only the rights between mortgagor and mortgagee. Thus, the mortgagee's claim against the VA as guarantor survives non-judicial foreclosure.

It follows that the VA's indemnity right also survives foreclosure by advertisement. The indemnity contract is essentially a third-party guarantee. The guaranty agreement and associated right to indemnification constitute a third-party contract between guarantor and mortgagor, and this relationship is not covered under plain language of Minnesota's anti-deficiency statute. The principle of the statute also does not apply because, as was the guarantee agreement in Victory Highway, the VA's right to indemnity derives from a contract independent of the mortgage. As indemnitor the veteran is in the same position as the guarantor: accordingly we conclude that Minnesota law does not impair the VA's right of indemnification and we conclude there is no need for finding federal preemption.

The indemnity agreement imposes a heavy obligation on the veteran, one that weighs even heavier when the veteran allows a purchaser to assume the VA loan and does not obtain a release from the VA.8 The veteran then cannot ensure that the new owner will comply with the mortgage covenants, yet the veteran is still liable upon the new owner's default. This unenviable situation is exacerbated when the veteran receives no notice of foreclosure and cannot ensure that fair value is received, nor can the veteran redeem if he is unaware of the sale.

Although perhaps this scheme is enforceable as between private parties, government participation in this type of foreclosure procedure raises serious due process questions.9 "For more than a century the central meaning of procedural due process has been clear: 'Parties whose rights are to be affected are entitled to be heard; and in order to be heard they must first be notified.' " Fuentes v. Shevin, 407 U.S. 67, 80, 92 S. Ct. 1983, 1994, 32 L. Ed. 2d 556 (1971) (quoting Baldwin v. Hale, 1 Wall. 223, 233, 17 L. Ed. 531). In Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 70 S. Ct. 652, 94 L. Ed. 865 (1950), the Court held that any state action that will affect a property interest requires "notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them opportunity to present their objections." Id. at 314, 70 S.Ct. at 657.

A highly relevant case following Mullane is Mennonite Board of Missions v. Adams, 462 U.S. 791, 103 S. Ct. 2706, 77 L. Ed. 2d 180 (1983). In that case the Court considered an Indiana statute that allowed the state to foreclose for delinquent property taxes without notice to the mortgagee. Although the mortgagor received personal notice under the statute, the court held that "[s]ince a mortgagee clearly has a legally protected property interest, he is entitled to notice reasonably calculated to apprise him of a pending tax sale." Id. at 798, 103 S.Ct. at 2711. The Court concluded that because notice by advertisement is not designed to reach those with a legal interest in the property, and because the state had an inexpensive and reliable means of reaching the mortgagee, notice by posting and publication did not satisfy the Mullane "reasonably calculated to apprise" requirement. Id. at 799, 103 S.Ct. at 2711-12.

All that was said in Adams has equal force in the present case. Indeed, if the mortgagee's interest in property merits personal notice, the mortgagor's rights would appear to require at least that amount of protection. This was the reasoning of the court in United States v. Whitney, 602 F. Supp. 722 (W.D.N.Y.1985). Addressing the same issue that is currently before us, the Whitney court found that the due process clause barred the VA from recovering a deficiency from a veteran when the VA had not made a reasonable attempt to provide the veteran with personal notice of the foreclosure sale. Although the court acknowledged that the VA's indemnity right as developed under Shimer allows the VA to recover from the veteran even when the mortgagee's rights are extinguished, the court held that "the Government's intimate complicity in the violation of defendant's statutory and constitutional rights" made that right unenforceable. Id. at 734.

The remedy in Whitney was not to require the VA to pursue judicial foreclosure procedures under New York law. Instead, the court held that the VA must ensure that the veteran receive notice prior to the foreclosure sale. Id. The VA can easily comply with this requirement because it receives notice of foreclosure from the lender and because it is likely to know the address of the original mortgagor and indemnitor. Indeed, if the VA can find these veterans to withhold their disability checks and tax refunds, it should have no difficulty notifying them of a pending foreclosure sale.10 Requiring the VA to provide notice seems a logical and fair idea that the VA should have implemented on its own in the first place.

Although the veterans raised a due process claim before the district court, the issue was not addressed on appeal because the veterans prevailed on other grounds. However, without deciding whether the due process clause otherwise would be violated, we hold that the VA must make a good faith attempt to provide reasonable personal notice to the indemnitor of the foreclosure sale before it can obtain a recovery under its indemnity contract. In developing federal rules of decision we can be responsive to concerns for fairness whether or not they rise to constitutional magnitude. See Clearfield Trust Co. v. United States, 318 U.S. 363, 366-67, 63 S. Ct. 573, 574-75, 87 L. Ed. 838 (1943) (stating that "[i]n absence of an applicable Act of Congress it is for the federal courts to fashion the governing rule of law according to their own standards").

This rule of decision prevents frustration of the ultimate objective of the VA program, which is to provide assistance to veterans and make their lives better, not worse. The notice requirement is not difficult or expensive, so it does not impair the VA's right to indemnity. The VA may continue to follow Minnesota's non-judicial foreclosure procedure as long as it attempts to provide the indemnitor with reasonable personal notice of the foreclosure sale. Thus, the rule also is in accord with Shimer because it maintains the VA's ability to abandon its subrogation right and rely on its indemnity right when it proceeds by non-judicial foreclosure. The rule also fulfills the veteran's expectation that he would receive notice of the foreclosure sale. Above all, the rule is fair.

Accordingly, the district court's order is modified to allow the VA to exercise its indemnity rights against the veteran after non-judicial foreclosure when the VA has made a good faith effort to provide reasonable personal notice to the veteran prior to the foreclosure sale.

The judgment, as modified, is affirmed.